Regulatory and criminal investigations into companies and their management are a growing source of exposure for both those involved in the investigation and their D&O insurers. This key topic was the subject of a BLG seminar to the London Market on 7 July 2010.

In this edition of the D&O Review we summarise the main issues addressed by the speakers as well as a few other recent developments of interest.

Background

Following the decision of the US Supreme Court in Morrison v National Australia Bank that "foreign-cubed" cases are no longer welcome in the US courts, the exposure of non-US companies to civil shareholder securities claims has arguably been curtailed. However, in our practice we are seeing a marked increase in severity and frequency of criminal and regulatory investigations for which D&O insurers will pick up the costs. This is perhaps not surprising. In response to public pressure following the worldwide financial crisis, regulatory agencies globally have stepped up activity, particularly in the key sectors of financial markets and services, anti-corruption and anti-bribery, and competition law.

Other trends are emerging:

  • the increasing emphasis on the criminalisation of corporate conduct, which is best illustrated by the increase in bribery and anti-corruption prosecutions;
  • targeting of individuals for prosecution by regulators such as the FSA on the basis that it has a greater deterrent effect;
  • self-reporting and whistleblowing are encouraged by bodies such as the Serious Fraud Office ("SFO") and this has meant that even the best managed companies are very quick to start their own internal investigations; and
  • there has been a significant growth in trans-border investigation and cooperation between regulators from different countries. This leads to issues such as regulators exploiting jurisdictional differences. For example, we have seen the US Department of Justice ("DoJ") and Securities and Exchange Commission ("SEC") ask to be present at an interview of individuals by the SFO, in which the SFO can compel individuals to answer questions under English law that the DoJ could not under US law due to the Fifth Amendment.

For directors this means that they cannot help becoming involved in investigations, many of which will start internally. Often, a Special Committee or Board Sub-Committee will be appointed for the purposes of the investigation, which may appoint its own counsel, and are usually not hesitant in laying the blame at the door of executives (especially past executives). This can mean that individual directors swiftly move from being part of the process to a target, and leads to issues such as refusals to cooperate, threats of dismissal and conflict issues.

For insurers, the current global explosion of investigations raises a host of issues, in terms of the costs involved, and the practical and procedural difficulties that can arise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.